Trade War to Tech War

Rise of China:

Nearly 40 years ago, China maintained policies that deteriorated the economy and relatively isolated from the world economy. Since the initiation of trade liberalization and economic reforms in 1979, economically China has been growing very rapidly with a 9.5 (% of GDP) growth rate annually through 2018. This article will discuss US-China from Trade War to Tech War.

According to the World Bank report, if China’s economy grows at the same pace, it would double its GDP every eight years and able to lift an estimated 800 million people out of poverty. This economic rise of China is quite challenging for American supremacy.

The United States of America is perceiving it as a potential threat to its national interests. Interestingly, China is not the first perceived “threat” to the US economy and its commercial interests since the end of World War II. It dates back to 1985, an article was published with the title” The danger from Japan”.

In the past, the trade war measures against Japan were constantly applied by the US. The US-Japan War of the 1970s and 1980s is the lesson for the US-China trade war. In 2016 Donald Trump came into power and continuously accusing China of its unfair and illegal economic practices. Since Trump took office American policies are quite clear regarding the containment of China’s economic rise.

US-China from Trade War to Tech War:

A Republican nominee Donald Trump succeeded President Barak Obama as a 45th president of the United States of America in 2016 presidential elections. The Trump slogan during the 2016 presidential election campaign was “Make America Great Again”. Trump wants to ensure America’s economic security because he emphasizes that economic security is the foundation of national security.

A key part of president trump’s economic policy during his first three years was to boost economic growth via tax cuts and additional spending, both of which significantly increased federal budget deficits. Trump administration has shifted its China policy from engagement to decoupling.

During his headmost address back in 2017, Trump stated his policy “America First”, which included the goals to reduce the trade deficit and bring back the manufacturing jobs off-shored to other countries as Mexico and China.

September 17, 2018: In fulfillment of his election pledges, Trump announced its 10% tariffs on $200 billion worth of Chinese goods would begin on September 24, 2018, increasing to 25% by the end of the year under the section 301 of the Trade Act in August 2017.

They also threatened tariffs on an additional $267 billion worth of imports if China retaliates, which China promptly did on September 18 with 10% tariffs on $60 billion of US imports. China either imposed tariffs on $ 110 billion of U.S. goods representing most of its imports of American products so far.

By September 2018, three rounds of additional tariffs had been implemented on each other by both sides. A major step towards reconciliation, at a meeting between the head of both states, held on December 1, 2018, and the USA gave China a 90-day relief from additional report tariffs.

However, this hope was betrayed when President Trump suddenly announced on May 5, 2019, a plan to hike the additional tariff rate imposed on the $200 billion of Chines good covered by the third round from 10% to 25% which had postponed twice on the ground that China had backtracked on commitments it made in earlier negotiations.

Most important is that what makes things worse is that the dispute between the USA and China has propagated from issues regarding the trade war to those involving technology. Most specifically, to deter Chinese companies from getting cutting-edge technologies through direct investments in the USA.

An inter-agency committee on Foreign Investment in the United States (CFIUS) is charged with the task of monitoring foreign direct investments based on the Foreign Investment and National Security Act of 2007.

A further step towards constraining technology transfer, the National Defense Authorization Act (NDAA) for the fiscal year of 2019, signed by President Trump on August 13, 2018, constrains the Foreign Investment Risk Review Modernization Act which strengthens the authority of CFIUS, and the Export Control Reform Act of 2018 which provide for countermeasures against the transfer of critical US technologies to other countries and it is widely believed that these new laws are “ tailor-made” for China.

Turning to the Economic Control Reform Act (ECRA), it authorizes the Department of Commerce to establish appropriate control on export, re-export, or transfer of emerging and foundational technologies those essential to the national security of USA includes biotechnology, artificial intelligence, machine learning technology, position, navigation, timing technology, microprocessor technology, such as advanced computing technology, sensing technology, robotics, advanced surveillance technologies, and some other advanced technologies. Not surprisingly this list to a large extent overlaps that of the 10 priority sectors of “Made in China 2025”.

Some Chinese high-tech companies, specifically the two telecommunications technological giants Huawei and ZTE are facing great restrictions even in areas outside the jurisdiction of CFIUS when doing business in the USA. The USA has treated the Huawei, as the world’s largest supplier of telecommunications networks and the second-biggest maker of smartphones with leading 5G technology, as a threat to national security since2012.

On May 15, 2019, the US Commerce Department added Huawei and 68 affiliates to its Entity List which comprises individuals and entities subject to specific license requirements for the export, re-export, and in-country transfer of specified items. This move-in effect bans Huawei from buying parts and components from US companies without US government approval. The US ban on Huawei not hurt only Huawei but also its supplier worldwide many of which are US companies.

Along with Huawei, ZTE, China’s second-biggest producer of telecommunications equipment, is another target of USA sanctions. ZTE was first added in the Entity List by US Commerce Department in March 2016 for alleged violations of US sanctions. The tech war between the USA and China is escalating, with the USA taking new initiatives and China preparing counterattacks on multiple fronts. Huawei and many other companies of the USA Entity List that bars them from buying US parts and components without US government approval.

Most of the Chinese entities on this list are related to the high-tech areas. At the same time, the US government is seeking the cooperation of its allies to ban Huawei and other Chinese high-tech companies. The tech war between China and the USA which has now escalated into tech war and it is a war with no winner that would hurt both sides as well as the world economy.

Written By: Tanveer Abbas


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